Top 5 Important Investing Lessons from Peter Lynch
Created on 12 Aug 2021
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Updated on 16 May 2022
Investing is like collecting seashells, and to do so, one needs to dive deep into the ocean of investing mantras given by legends like Benjamin Graham, Warren Buffett, Rakesh Jhunjhunwala, etc.
One such investing sage is Peter Lynch, notably amongst the best of his decade. Peter, not only has been one of the best fund managers, but also has had a great impact on individual retail investors who have followed him over the years. His analogies preached that individual retail investors have a distinct advantage over large fund managers since they have bureaucratic flexibility over the market's short-term performance.
We’ll explore his investment strategies today, but before that, here’s a brief overview of his incredible feat!
Peter Lynch’s Investment Returns
He reaped his investing philosophy while working for ‘Fidelity Management and Research’ where he successfully managed ‘Fidelity Magellan Fund’ for 13 years, from 1977 at the launching of the fund to 1990 when he retired.
He averaged a return of 29.2% CAGR during his reign, which many successful triumphant fund managers could not do over years. To give it a numeric connotation, every ₹1 Crore invested on the launch of this fund would have amounted to around ₹28 Crores by the time Lynch retired, in just over a decade! The best part about his gratified journey is that he has always been very vocal about his investing philosophies; he has quoted his success mantras in his books like ‘Beating the street’ and ‘One up on Wall Street’.
In this blog, we bring out to you the five best investment lessons by Peter Lynch that will help you with investing, personal finance, and attaining your financial goals.
Its Neither Black nor White; it's Grey
Peter says that "Making money in the stock market is a combination of science, art, and legwork." Fundamentals of a company and many weaved characteristics are logically bound and have a cause-and-effect relationship.
While on the other hand, making predictions and estimations about the company will involve asking pertinent questions to oneself and having a curiosity for finding their answers like what caused this in the past? What may this lead to in the future?
If not now, When?
Peter was not a great fan of those who believed in timing the market. He says that "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves."
He advocated long-term commitments with quality stocks, but this doesn't necessarily mean that investors should hold onto stocks forever. Instead, Peter focused on reviewing his holdings every few months, rechecking the company story and fundamentals.
The key to knowing when to sell, he says, is to know "why you bought it in the first place." Thus, he is instilled in having a clear investment objective and sticking to it in the long run. For Lynch, price fall is an opportunity to average out a quality stock. Rather than selling a stock, he believed in the rotation theory, which substantiated selling the company and replacing it with another company with a similar story but better prospects.
KYC (Know Your Category)
Peter categorized the entire universe of stocks into six heads:
- Slow growers
This category consists of large, matured, and stable companies that grow along with the economy. These companies usually pay high dividends and grow yearly at 8-10% per annum. Peter personally didn't find such companies appealing for huge investment sizes. In the context of the Indian market, companies such as Wipro, Colgate, Dabur could fall under this category.
This category consisted of large companies with more scope for growth when compared to slow growers. These companies have the potential to grow at a rate of 12-18% per annum. In the context of the Indian market, companies such as Nestle, HUL, and Reliance could fall under this category.
- Fast growers
The companies that foster the potential to turn into multi-baggers qualify under this category; a rational investor is needed to identify such companies and hold them till they deliver the desired return. For example, Titan was identified by Rakesh Jhunjhunwala in 2003 when it was priced at ₹ 3 per share, and today, it is priced at ₹ 1720.
This was one of the most treasured categories for Peter Lynch. Such companies were usually engaged in selling luxury products. Such companies are featured by cyclical trends in revenue, profits, and customer base. Peter believed that these kinds of stocks could result in high losses if entered in the wrong part of the market; hence he believed in buying such stocks when the economy was weak, and he says that the trick with such kinds of stocks is to exit before their downtrend arrives because many times cyclical are confused with being stalwarts. Automobile stocks are an example that comes under the cyclical category.
“Eagles fly against the wind and not with it.” Similarly, there are companies that are going through tough times, that are battered, on the verge of bankruptcy, and aren’t really growing. But such companies can turn the tables for investors since these are high-risk, high-reward companies. They are categorized as turnarounds. Peter says that low-risk takers should strictly stay away from such companies; however, these companies could be a blessing in disguise for high risk-taking investors because these companies may turn 2x in a concise span if they receive financial assistance and other fundamental support. For example, Vodafone-Idea.
Peter defines them as stocks whose assets are overlooked by the market and are undervalued. These assets could be real estate, properties, cash, equipment that the company is holding but are not valued by investors when downtrends happen. Many public sector stocks can be classified as asset plays.
Signs of 10x Bagger stocks
Peter, while searching for multi-bagger stocks, used to look at the below-mentioned characteristics as favorable ones:
The company name is boring, the product or service is in a boring area. Example: Pidilite Industries' limited share price grew from ₹100 in 2010 to ₹2280 in 2021.
The company is a spin-off, and such companies usually get immediate attention and good gains in a short span of time. Example: Jio spinning off from Reliance LTD.
The company is a user of technology. For, e.g., Asian Paints, a celebrated multi-bagger.
Promoter and management stake is high.
There is a low institutional stake and low analyst coverage; this implies that stocks are not over-exposed.
The industry has a product base of recurring revenue and is not a one-time product. Example: Soft Drinks and razor blades.
Patience is the real virtue
Peter Lynch quoted that "The most important organ in the body as far as the stock market is concerned is the guts, not the head. Anyone can acquire the know-how for analyzing stocks, but only a few have the virtue of waiting until it's the best time to take the shot".
Further, he says that an important key to investing is remembering that ‘stocks are not lottery tickets. He always believed that "The stock market really isn't a gamble, as long as you pick good companies that you think will do well, and not just because of the stock price."
Peter Lynch's investing lessons offer practical approaches that cater to the needs of multifold diverse kinds of investors from high risk-taking to low risk-taking. To conclude this piece, let’s quote the legend himself “Know what you own and the reason why you own it.”
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